Putting the words ‘ECB’ and ‘action’ in the same sentence is a struggle, but the central bank may have done the European financial system a favour with its latest moves to ease liquidity argues Kames Capital’s fixed income manager Gregory Turnbull-Schwartz.

‘European Central Bank’ and ‘action’ have often only seemed appropriate to include in the same sentence if accompanied by words like ‘fail’, ‘unable’ or other such negatives. But that is changing. The 28 December press release by the European Central Bank (ECB) showed the effects of the prior week’s long-term refinancing operation, the first of the three-year maturity funding opportunities being offered to euro area banks by the ECB. The ECB balance sheet now looks rather large, at €2.7trn. The most hyperactive central bank in the land, the US Fed, has a balance sheet of ‘only’ $2.8tn. The ECB‟s lending to euro area credit institutions increased about 50% since early November.

Why is this important? Many have been commenting on the lack of policy response by what is usually called in vague terms “the EU” to the crisis of confidence and the manifestations of this in the high sovereign debt yields in the euro area. The enlarged European Financial Stability Facility has not happened, there is still noresolution to the private sector involvement in Greek government bond write-downs, and there has been little tangible evidence that legislators are going to provide the solution to the crisis. There is a focus on the need for common debt issuance the so-called Euro bond and the effort toward greater fiscal integration of Europe. This is misplaced. Those are longer-term developments. Meanwhile, the central bank is doing what a central bank is supposed to do; working to put liquidity into the financial system within the guidelines that govern it. By providing the banks with liquidity, easing the immediate stress on the financial system, the ECB is giving legislators flexibility. That may ultimately be squandered, but for the meantime we should look favourably on the ECB action.

There are significant trade imbalances within the euro area. In broad terms, this is a case of Germany increasing net exports and the rest of the euro area increasing imports. A glance at a few charts (sourced from Eurostat) showing trade balances of Germany, France and Italy helps illustrate the point regarding patterns of trade. Germany demonstrates a generally growing positive balance of trade overall, and within the EU-27 trade area a much better balance than key partners.